Lifestyle's hidden costs

Retirement villages are a popular choice but can be a huge drain on finances, writes Lesley Parker.

February 16, 2011 — 3.00am

Changes to legislation covering retirement villages haven't stopped the flow of complaints from residents about contracts that often block their way to any return from what is likely to be their final property transaction.

Australians are fond of bricks and mortar and they're used to making money from real estate but buyer's advocate Richard Andrews, who specialises in finding retirement units, says it's a ''good outcome and I think a fair one'' if he can get a client in and out of a village within 10 years with their original capital intact.

Non-negotiable...John and Graham Ellis.Credit:Eddie Jim

Many retirees get back less than they put in once a village operator has collected various fees and charges and perhaps a cut of the increased value of a unit - and that can be after years of capital gains in the surrounding suburb.

What's left when they move out - on average, 10 years later - depends on the parameters of any departure fee charged, whether the operator receives a share of any capital gain and what the contract stipulates, among other things, about having to refurbish the unit before resale.

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The bottom line is you need to consider the overall cost of the lease or purchase when assessing a village.

''You certainly don't buy into a retirement village to make money,'' says Andrews, the chief executive of the Find My Retirement Home service. ''It's a lifestyle choice and retirees need to keep that in mind.''

TRANSPARENCY ISSUES

Residents' advocates say villages can be great for downsizing, security and companionship and they welcome changes to state legislation covering villages in NSW and Victoria that have improved residents' rights.

However, they remain concerned about ownership structures that are difficult to compare; the dominance of long-term lease agreements that they say favour for-profit operators; thick contracts that are hard to understand; and the transparency of ongoing fees.

They're also disappointed the Productivity Commission draft report on aged care didn't take up a suggestion that retirement-village legislation become a federal government responsibility. The report did, however, recommend state and territory governments pursue nationally consistent laws.

''It is an excellent model of living - I would be the first to say that,'' says the president of the Retirement Village Residents' Association, Malcolm McKenzie. Now 80, he has lived in a NSW village for 15 years.

''The reason I'm involved [in the association] is not because I don't like living in a retirement village, it's because of a list of things that operators do because it's basically a for-profit environment … because they feel they have a captive market.''

CONTRACTS AND COMPLEXITY

The chief executive of the Retirement Village Association (RVA), Andrew Giles, says the entry of big corporate groups in recent years ''provides a good economic diversity that reflects an industry reaching maturity'' and permits savings from economies of scale.

Whatever side of the picket fence they're on - resident or operator - all agree buyers must examine village contracts and disclosure statements carefully, with the help of a specialist lawyer, to ensure they know exactly how much they'll be paying and what they'll be paying for.

Andrews says that while buying into a village is not an investment decision, ''you've got to undertake a good investigation of the facility and its arrangements so you understand what you're signing and you know what your financial outcome is going to look like when you leave''. ''Some people don't really understand what they're signing when they buy and it doesn't bite them on the bum until they leave.''

Giles defends the departure fee as ''the only avenue for an operator to make a return on their investment in a village''. He says monthly service fees are set on a cost-recovery basis only and don't cover the initial cost of building shared facilities such as swimming pools and emergency-call systems.

There are some key questions you can ask to find your way through the maze that is a village contract. For example, what's the ownership structure? The biggest problem people face, Andrews says, is comparing apples with apples.

''There are five main ways they can occupy [a unit],'' he says. ''There are new villages, there are old villages, there are ones with aged care attached. You can have two villages right next to each other and they'll have different pricing and different fee structures and it's quite difficult to compare them.''

The main structures are: freehold; leasehold (you buy the unit but lease the land); deferred management fee (or DMF, whereby you buy the right to occupy, then pay annual fees and an exit charge); company title; and strata title. Rental is another option.

Andrews estimates that in Australia about 90 per cent of village units are now occupied on long-term leases using a DMF structure.

COST TO MOVE IN

Andrews says the DMF structure was designed by non-profit operators so they could keep the upfront cost low to help people into units. That meant you'd pay, say, 70 per cent of the market value initially and the operator would recoup the difference once the unit was resold.

Today you'll pay the equivalent of the full market value while operators (now including big property companies such as Lend Lease and Stockland) still collect a DMF, Andrews says.

The chief executive of Australian Unity Retirement Living, Derek McMillan, who's also a director of the RVA, says retirement village units are usually cheaper than a similar, privately owned unit in the same suburb.

''Retirement village operators generally price units at a bit less, particularly if you take into consideration the community facilities that will be available to them,'' he says. ''We find as a general rule it's about 85 per cent of the median house price.

''Residents get to keep a bit more in their pockets but it also means that operators tend to charge a DMF to recover some of that difference at the end.'' (More on this later.)

ONGOING COSTS

Once you've paid the entry price, you need to be able to meet what are variously called ongoing, maintenance or recurrent fees. McMillan says a rule of thumb is that you'll contribute $10 a day towards village running costs but the more facilities a village provides, the higher the ongoing fees.

Andrews warns that some operators may charge lower recurrent fees but offset this with a higher departure fee.

McKenzie cautions prospective residents against being lured by the window dressing of fancy facilities that they'll pay for via the recurrent charge but perhaps not use. Recurrent fees can be a source of rancour between residents and operators.

''The money is the residents' money; it's not the operator's money - they are there to manage it,'' McKenzie says. ''[But] they don't all necessarily agree with that and they don't like giving you all the information, so we have battles about lack of transparency.''

State laws say residents are entitled to a clear understanding of how recurrent charges are determined - but residents and operators sometimes disagree about the level of detail required.

Residents of one village in Laurieton, on the mid-north coast of NSW, for instance, have challenged the insurance charge in their budget, saying they want to know in detail what sort of cover they're paying for and whether it extends to items that ought to be covered by head office, not residents.

Even where head office costs legally can be allocated to residents, there are disagreements over how a large operator assigns costs to individual villages. And in NSW, amendments to the law last year haven't stopped arguments over what constitutes maintenance (a residents' expense) and what's a capital improvement (to be funded by the village owner).

HOW MUCH TO LEAVE?

Eventually the time will come for the unit to be sold and your payout to be calculated. This is when departure fees kick in. McMillan says you should ascertain at the outset how any DMF will be charged - at what rate and over what period. Generally, DMFs accumulate at 2 per cent to 2.5 per cent of the purchase price each year for perhaps 10 years, he says.

But he describes DMFs as a ''moving target''. He says some contracts specify a DMF of 3.5 per cent a year and on the selling price, not the ingoing price. Some are levied over 20 years.

Andrews says some villages ''front-load'' the fee into the first few years of occupation, so they get the bulk of the money even if a person's stay is relatively short.

Then there's the question of capital gains. Under some contracts, part or all of the appreciation in a unit's value goes to the operator, which means even more money is deducted from the final selling price before the proceeds go to the resident or his or her estate.

On top of that, residents may be required to refurbish the unit to a certain standard for sale, at their cost.

Under one contract, that might mean new carpet and some fresh paint; under another it could mean the much more expensive option of installing a new kitchen and bathroom.

''Contracts are really general and open to interpretation around this - I try to tighten it up for clients,'' buyer's advocate Andrews says.

All this can make it difficult for ordinary people to work out where they'll end up in the long run.

Andrews puts contracts through a mathematical model so he can illustrate where they might end up financially when they leave. ''We can tell them, 'If you leave in year seven, this is what your costs are' - it brings it down to one number so that more than one village can be easily compared,'' he says.

An accountant or financial adviser experienced with retirement village contracts may also be able to provide such a forecast.

SALE OF THE UNIT

Residents sometimes complain of the time it takes to sell a unit and the price achieved. The contract may specify that the village operator will be in charge of the selling process.

Andrews, who negotiates with village agents, is critical. ''The standard of sales and marketing in retirement villages is woeful,'' he says.

Check the rules in your state as to whether you must be allowed to choose your own agent and whether village agents have to be registered real estate agents. Also ask the village operators about the average time it takes them to resell units.

Giles, of the RVA, says: ''It's in everybody's interests - the operator, outgoing resident and their family - that the property is sold as soon as possible''.

McMillan suggests seeing whether there's a guaranteed payout period - a maximum time a unit can sit unsold before the resident receives some sort of payment.

Also check how long you'll be liable for maintenance fees if the unit sits empty - do they cut out after months or could they go on for years? In NSW, for example, if you're entitled to at least half of the capital gain upon resale, then you may be required to contribute the same proportion of the recurrent fees beyond a 42-day cut-off that would apply otherwise.

Ultimately, if you're concerned about the way the terms of a contract are being applied, you can talk to your state consumer protection body.

NSW Fair Trading says it handled nearly 2800 inquiries and received 114 official complaints about retirement villages last year. Consumer Affairs Victoria logged about 500 inquiries and about 470 complaints.

Deferred management fee and lengthy sale period prove costly

When Graham and John Ellis's mother needed to move from her retirement village unit to an aged-care facility on the same site, the brothers were shocked to discover a big gap between what she'd get from the sale of her apartment and the bond she'd have to hand over to the same operator.

The unit that cost $146,950 in November 2001 - and which finally resold for $240,000 in May 2010 - left just $136,173 in their hands.

It was well short of the accommodation bond of $210,000 the hostel would have required if the health of their mother, Vi, hadn't deteriorated in the meantime.

She passed away in June 2009, in a high-care facility where no bond was required, with her apartment still on the market.

Graham Ellis says the unit's keys were returned to the village operator in November 2008 as their mother went into care but a sale wasn't settled until August last year.

The deferred management fee (DMF) came to $48,381 and the ''comprehensive upgrade'' they agreed to after the unit lingered on the market cost $49,422.

The family's lawyer acknowledged the fee was in accordance with the contract signed for the unit at Lexington Gardens, in Springvale, Victoria, but argued the DMF was ''excessive'' considering the time that elapsed between handing in the keys and final settlement - and with the family having no control over the process.

Lend Lease Primelife wouldn't negotiate, Graham Ellis says.

''They had no intention of doing anything other than sticking strictly to the conditions of the contract,'' he says.

Under the contract, the DMF was set at 3 per cent of the original licence fee (in effect, the purchase price) or 3 per cent of the new licence fee (the selling price), whichever was greater, for every year of occupancy up to 12 years.

If the unit had been occupied for three years or less, the fee would have been 10 per cent of the ingoing price or the resale price, whichever was greater.

Key points

The entry price is only one part of the cost of moving into a retirement village.

Residents and village operators may disagree about what should go into the maintenance charges.

Most villages now extract departure fees as well.

They may also take a slice of any capital gain.

You may have to keep paying recurrent fees while your unit is on the market.